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Subsidized Crop Insurance under Limited Access to Incomplete Financial Markets

Author

Listed:
  • Voica Daniel C.

    (School of Economics and Finance, Massey University, SST4.07, University Avenue, Palmerston North, 4442, New Zealand)

Abstract

Almost universally, crop insurance uptake has been very low in the absence of significant governmental subsidies. We proposed an explanation for the low uptake by analyzing farmers’ optimal behavior in the presence of subsidized crop insurance and incomplete financial markets. Under specific replication conditions, farmers’ valuation of crop insurance is lower than insurers’ valuation if farmers have access to fewer financial assets than insurers. A potential rationalization is that farmers and insurers have dissimilar price formation processes. Our model implies that subsidized crop insurance changes farmers’ production choices by altering both the relative returns across states of Nature and their risk choices. However, because of the separation between consumption and production decisions, farmers will use crop insurance in a manner consistent with profit maximization, independent of risk preferences.

Suggested Citation

  • Voica Daniel C., 2023. "Subsidized Crop Insurance under Limited Access to Incomplete Financial Markets," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 23(1), pages 165-189, January.
    • Handle: RePEc:bpj:bejeap:v:23:y:2023:i:1:p:165-189:n:7
    DOI: 10.1515/bejeap-2021-0073
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    More about this item

    Keywords

    uncertainty; portfolio analysis; incomplete financial markets;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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